Cap It Or Tax It?

April 9, 2007

The Washington Post has a front-pager today on the various problems that have been plaguing Europe's attempts to curb carbon emissions with a cap-and-trade system. The sheer complexity of the regime has, among other things, allowed countries to cheat in order to protect their home industries. The prognosis isn't exactly terminal--Europe's still working to iron out the wrinkles, and U.S. policymakers are trying to learn from their mistakes--but it's clear that most carbon-trading programs will inevitably allow for a certain amount of monkey business.

Now, economists such as William Nordhaus have been noting the problems with cap-and-trade for quite some time. And most environmentalists, I think, agree that if we want to reduce carbon emissions, a simple carbon tax would be easier to administer--and harder to cheat--than a cap-and-trade system (although lord knows companies are perfectly capable of lobbying for tax loopholes, too). The catch, though, is that most politicians see a carbon tax as a total non-starter, especially after the BTU-tax debacle in 1993. And legislators like the opacity of cap-and-trade, because it shields them from voter anger over price increases. That's why all the major climate-change bills in the Senate right now involve carbon trading.

On the other hand, conservative wonk-types are increasingly speaking out in favor of a carbon tax. Greg Mankiw and Kevin Hassett are both on board. And now I see Reason's Ron Bailey is flirting with the idea, too. So who knows, maybe we'll see some bizarre alliance between greens, right-wing economists, and libertarians on the issue.